BY MARK JAMISON
One of the cornerstones of PMG Pat Donahoe’s plans for the Postal Service is the transfer of postal employees and retirees from the Federal Employee Health Benefit Plan (FEHBP) into a plan run by the Postal Service itself. Mr. Donahoe has assured everyone that a Postal Service plan would offer the same level of benefits at similar or even cheaper cost to employees and retirees while saving hundreds of millions of dollars for the Postal Service.
The General Accountability Office (GAO) recently released a report evaluating the Postal Service proposal. The report (GAO-13-658) is entitled “U.S. Postal Service: Proposed Health Plan Could Improve Financial Condition, but Impact on Medicare and Other Issues Should Be Weighed before Approval.” The GAO examines the components of the plan, potential costs for premiums and out-of-pocket expenses for those covered by the plan, some of the legal and legislative pitfalls involved in making the switch, and potential costs to other entities such as Medicare and the Office of Personnel Management (OPM).
The GAO report considers various aspects of the proposal and what it would do, but it also helps raise some important questions about institutional prejudice and how economic numbers and issues get reported. It’s worth taking a look at the Postal Service Plan, the GAO report, and some of those larger issues. First let’s look at the Postal Service Plan (PSP) itself.
The Postal Service’s plan
The PSP would move employees from FEHBP to a plan run by the Postal Service. Instead of 140 different plans to choose from, employees would be given a single PPO-style plan. That’s a preferred provider organization (sometimes called a participating provider organization or preferred provider option) in which doctors, hospitals, and other providers contract with the insurer at reduced rates. There would be three levels of coverage — high, middle and value. A number of the FEHBP plans offer two options; for example, the most popular plan in FEHBP, Blue Cross Blue Shield, offers a standard and basic option. The PSP may also offer an HMO option where demographics allow.
The postal plan would offer four tiers of service: self-only, self and spouse, self and children, and self and family. The FEHBP plans offer either a self-only or self-and-family option.
The PSP would require Medicare-eligible employees and retirees to use Medicare Parts A & B as a first provider. According to data from 2011, about 8% of eligible postal employees were not enrolled in Medicare Part A, which covers hospital services, and 22% were not enrolled in Medicare Part B, which covers outpatient services.
For Medicare Part D, the Postal Service would seek what is known as an Employee Group Waiver Plan (EGWP). This would allow the Postal Service to seek a federal subsidy from Medicare for drug costs, discounts from pharmaceutical companies, and federal coverage for drug costs over certain catastrophic limits. Currently most FEHBP plans offer drug coverage that exceeds the benefits under Medicare Part D.
The basic changes in structure one sees in the PSP are changes that have also been discussed as possible reforms to FEHBP. For example, the OPM has pilot programs encouraging more use of Medicare. The OPM has expressed an interest in adjusting tiers and options, but it currently lacks the legal basis to make those changes. It has requested greater flexibility in designing its offerings. The Postal Service, however, has indicated that it is not interested in working with OPM to improve FEHBP.
The Postal Service would also need several legislative changes in order to offer its plan but claims it has the authority to do some things OPM cannot. The PSP is also contingent on negotiations with postal unions.
The Postal Service has stated that it would hire an outside vendor to administer its plan. It expresses confidence that it can offer wide provider participation in its PPO network based on the fact that the vendors it is considering already have widely developed provider relationships.
FEHBP currently serves just over four million employees and retirees. The Postal Service component of that is nearly one million, or about a quarter of the FEHBP enrollment. The question of whether the Postal Service could provide as broad a network as currently offered by FEHBP plans such as Blue Cross is left somewhat unanswered by the GAO report. Given that the PSP would be a fourth the size of FEHBP and that postal employees are broadly dispersed across the country, many in rural areas, it’s a question that needs a more definitive answer.
Premiums would vary across the plan options and tiers, but the Postal Service claims that the premium costs and out-of-pocket expenses would generally be comparable to what employees and retirees are currently paying. Currently retirees pay, on average, about 28% of the total premium. Employees under the terms of labor contracts pay 24%, with that amount climbing in future years. EAS employees are being moved towards the 28% contribution level.The Postal Service says that in the first year of the plans, employee premiums would vary between 26% at the high option down to 17% for the value option. Retirees would pay 32% for high option and 25% for middle and value options.
Funding the plan: Two scenarios
The Postal Service proposes to fund its plan in one of two ways. Scenario 2 actually seems to be the preferred method. Under that scenario the Postal Service would withdraw the approximately $46 billion it has thus far contributed to the Retiree Health Benefit Fund (RHBF). It would also take possession of the Employee Health Benefit funds that now reside with the OPM. These two funds would be combined into a new Health Benefits Fund (HBF). The former RHBF funds would not be segregated for use solely for retiree expenses but could be used for other purposes. Current employee and retiree premium contributions as well as Postal Service contributions would go into this fund. Benefits and claims would be paid from the HBF.
The Postal Service claims that if this option were enacted the former RHBF funds would be dedicated solely to the payment of retiree health benefits. It also claims that the HBF would be ring fenced so that the funds would be protected in the event of a future Postal Service insolvency. It also claims that the funds could not be loaned to the Postal Service, be attached by creditors or used for purposes other than payment of health benefits.
The HBF would be maintained by the Treasury, but the Postal Service would appoint qualified asset managers who would have the authority — without Treasury approval — to invest the assets of the fund in both public and private instruments such as Treasury securities, stocks, bonds, commodities, real property or foreign currencies. There would be a seven-member oversight board with one member appointed by the Treasury, one by the labor organizations, and one by the postmaster and supervisors organizations.
The Postal Service indicated it wanted this fund set up under separate legislative authority to avoid future difficulties like those that have arisen regarding overpayments and excess contributions in the retirement funds. There would be a mechanism to transfer excess assets back to the Postal Service, with the approval of the oversight committee and based on a current actuary’s report.
The other option, Scenario 1, was developed in response to concerns that many have voiced and that GAO echoes in its report about the investment risk associated with Scenario 2. The Postal Service envisions large gains from market investments of the HBF funds, but critics have pointed out that it is not in a good position to weather losses from downturns or market corrections. There is also some concern that the ability to remove “excess” funds from the HBF on annual basis would not sufficiently address longer-term actuarial risks.
Under Scenario 1 the RHBF would continue to hold funds to finance retiree health benefits but it would no longer be administered by OPM. The funds would continue to be invested in special-issue Treasury securities or other investments dictated by Congress.
The GAO report has a thorough discussion of both of these funding schemes as well as the risks associated with the transfer of surpluses from the funds for use in postal operations. GAO is particularly concerned that these sorts of transfers could leave the Postal Service in the position of being unable to pay current claims if those claims exceeded expectations. Generally the GAO seems skeptical of this part of the Postal Service’s proposal.
Comparing costs & benefits
Apart from concerns about how the financing of the plan is managed, employees and retirees will be most interested in how the coverages and costs of the Postal Service Plan compare with current the current situation under FEHB. Policy makers will also be concerned with the overall savings to be gained from the proposal as well as impacts on Medicare and FEHBP.
The GAO analysis indicates that: “Under the proposed USPS plan, as designed for the first year, postal employees and retirees would have coverage for a similar package of services as those covered by selected FEHBP plans that we reviewed, and the level of coverage would be similar for many services, with some exceptions.” (emphasis added)
GAO compared the USPS proposal to the seven most utilized FEHBP plans, which combined have more than 75% of enrollees. The GAO said it could not compare benefits and costs beyond the first year because, as indicated in a footnote, “USPS’s benefits could change” (p. 38, fn. 61).
Generally speaking, the GAO analysis indicates that coverage, premiums, and out-of-pocket costs for the proposed plan would be similar to the current system. In a letter sent to several media outlets, the PMG averred that only a “small minority of employees electing full family coverage would pay more for health care benefits, but the overwhelming majority would pay far less immediately, and all employees would pay less over their careers.”
Mr. Donahoe’s assertion does not seem substantiated by the GAO report. GAO agrees that benefits, premiums, and coverage are comparable. The GAO defines comparable premiums as being within 10% of the premium the employee or retiree would have paid, a more general standard than Mr. Donahoe’s. In fact, GAO says the plan would have benefits of “comparable ‘actuarial value’ to the largest FEHBP plan in the first year of implementation,” which is somewhat less reassuring than Mr. Donahoe’s statements.
An aside: The GAO on the arbitration issue
There’s another big caveat here that GAO doesn’t get into very deeply. The GAO points out that for those covered by union contracts the plan benefits would be subject to negotiation or arbitration. Over the years GAO has been quite vocal in arguing that the rules of arbitration applying to postal workers ought to be changed to account for the financial health of the Postal Service. This report is no different and GAO takes what is otherwise a fairly straightforward analysis and gives it a very specific institutional bias by continually referring to the necessity to tilt the terms of contract arbitration decidedly in favor of the Postal Service.
Title 39 Section 1207 addresses the use of arbitration in settling disputes when labor and the Postal Service cannot come to a negotiated agreement. The most important language reads:
The arbitration board shall give the parties a full and fair hearing, including an opportunity to present evidence in support of their claims, and an opportunity to present their case in person, by counsel or by other representative as they may elect. Decisions of the arbitration board shall be conclusive and binding upon the parties. The arbitration board shall render its decision within 45 days after its appointment.
Arbitration by definition is a process where parties present evidence and arguments with the goal of winning the arbitrator’s agreement. The law governing arbitrations between the Postal Service and its unions affirms this definition quite clearly. Presumably the parties to an arbitration would offer in great detail the mitigating and extenuating financial conditions that would add strength to their case; nothing in current law or practice prevents the Postal Service from developing a compelling arbitration case that includes reference to its financial conditions and circumstances. GAO and those who would change this law to place the financial condition of the Postal Service in a special category of consideration would put their thumb on the scale of justice, creating special conditions tilted towards the Postal Service.
The current financial condition of the Postal Service is not merely a function of the postal business model we so often here about. The model itself is one determined, to a large degree, by Congress. The management of the Postal Service and the Board of Governors also determine where they will focus their attention, efforts, and resources. Additionally, Congress has subjected the Postal Service to mandates and limitations that are almost wholly responsible for the current reported losses.
There’s no question that the focus of postal management, many in Congress, and certainly the mailing lobby has been on creating a rate system and business plan that focuses solely on the interests of the direct mail industry. Never mind American communities, never mind postal workers, and don’t bother with all of the many reasons for maintaining postal infrastructure.
The GAO’s incessant repetition of the call for tilting the arbitration scales is a reflection of this focus. It stands less as a product of solid analysis than demonstration of a clear prejudice. It undermines the integrity of the GAO and betrays a prejudice against both workers and communities. It does not fall under the category of analysis or advice but of advocacy.
Back to the plans
So with respect to premiums, coverage, and out-of-pocket costs, the GAO finds that the proposed Postal Service Plan is generally comparable with current FEHBP offerings with a few very important caveats.
First, there is the very big issue of how long the plans would be “comparable.” The report says the current and proposed plans would be similar through the first year, but it has little to say about what happens after that. Because parts of the proposed plan are subject to negotiation and possibly arbitration, the plan could change dramatically for current employees. That lack of certainty is heightened because GAO endorses changes in current law that would tilt the advantage of arbitration, and by that consequence influence negotiation as well, heavily towards the Postal Service. Postal executives and Congress could create financial conditions that would almost assure heavily prejudiced arbitration decisions. For union negotiators, arbitration would become not merely a risk but a threat, perhaps making them more pliable.
For those already retired, the long-term comparability of the plans relies on Congress maintaining provisions in law that protect retirees. Without those protections, retirees have no power to negotiate and none of the slim protections that arbitration would offer. Those who retire during the first year of the plan would not enjoy any of the current legal protections other retirees do and could be at the mercy of the Postal Service. Mr. Donahoe assures us that all the current protections would continue, but without a specific force of law his assertions are mere promises.
Generally speaking, the charts accompanying the GAO report indicate that out-of-pocket expenses and deductibles would be similar between plans. However, since the Postal Service Plan is short on specifics and does not yet have a plan administrator, there are a number of “what if” situations to consider. The final product could have minor differences that have significant consequences. It’s wise to remember that the cost of a plan is not limited to its premiums. Out-of-pocket expenses play a big part as well. Also, in a PPO the breadth of the network and how out-of-network care is handled play a big part in affordability and access to care.
The Postal Service acknowledges that some may lose access to their current providers in the new plan. That could be a very big deal for those with chronic illnesses and established relationships with doctors and other providers.
Impacts on FEHBP and Medicare
The GAO also looks at how the Postal Service Plan affects FEHBP and Medicare. The report says that about 29,000 policy holders in FEHBP plans that are currently provided by postal organizations and filled by mostly postal employees and retirees would likely have to choose another plan. That’s a relatively small but not insignificant percentage. GAO does not seem to be concerned about how other non-postal offerings would be affected, but some plans like Blue Cross Blues Shield may lose significant amounts of members. Basically though GAO says that FEHBP premiums should not be greatly affected.
Walton Francis of the conservative think tank AEI has written extensively on the FEHBP and government health insurance. He testified in March of 2012 before the House committee that oversees the Postal Service. He is much less sanguine about the impact of the Postal Service proposal to leave FEHBP. In his written statement to the committee he testified: “The USPS proposals would massively disrupt or destroy FEHBP, the single most successful health insurance program ever operated by the United States government. In destroying the FEHBP, the USPS would disrupt the health insurance of 8 million Americans, and breach statutory entitlement promises to millions of Federal retirees”
The GAO does not refer to Mr. Francis’ work nor does it address many of the concerns he expressed in his testimony before Congress or in his other writings, despite the fact that he is an acknowledged authority on Federal health benefit plans.
The section of the report that seems to have drawn the most coverage of the media is the fact that Medicare would likely see its costs rise by $1 billion in the first year and $1.3 billion in subsequent years. This brings us to another one of the great institutional failures of GAO, the way it reports both large numbers and the way it discusses long-term liabilities for entitlement programs.
The economist Dean Baker is a cofounder of the Center for Economic and Policy Research (CEPR). His Blog Beat the Press examines economic reporting in mainstream and popular media outlets like the Washington Post and the New York Times. Dr. Baker is one of the more astute commentators on economic issues, regularly pointing out some of the major fallacies that the media engage in when reporting economics.
For example, he often points out that reporting big scary numbers without giving them context misleads readers. A perfect example of this would be some of the headlines following the release of the GAO report. Most of the media outlets reported that the plan would cost Medicare billions. They did not also note that increases to the annual Medicare spending of $550 billion would be 0.2% — two-tenths of one percent — which is a somewhat less scary perspective than “billions.”
One of the worst purveyors of scary numbers without context is David Walker, a former head of the GAO. In this article Dr. Baker takes Mr. Walker to task for reporting that the unfunded mandates of Social Security and Medicare are $73 trillion. That number is for costs over 75 years, it doesn’t reflect the taxes and revenues that will come in during that time, and it doesn’t mention that GDP over the same period will be more than $1000 trillion – all of which would provide context and make the big scary number a little less big and much less scary.
Unfortunately, a good deal of the reporting of the financial problems surrounding the financial crisis the Postal Service finds itself in fall prey to basic fallacies and red herrings like this one. The RHBF itself is something of a response to scary numbers without context (as well as a means of Congress making its own books look good). GAO generally provides solid analysis but too often slips into editorializing.
The final take on all of this is that GAO finds that the Postal Service proposal does reduce Postal Service expenditures for healthcare. Basically it does this by eliminating the payments to the RHBF and placing the current RHBF funds at the disposal of the Postal Service. The report finds that most of the additional savings come from requiring the use of Medicare for eligible employees and retirees.
GAO couches its language in terms that soften and obscure. The report makes clear that everything is sensitive to the underlying assumptions — assumptions about growth and inflation, about lifespan and probabilities of health and disease, about return on investment. The assumptions, the GAO assures us, are all reasonable and sound, and in a very discrete sense, that’s not arguable.
But reading the report carefully and placing it in the general context of broader issues facing the Postal Service and in the specific context of some of the institutional biases that seem to be ingrained in both the Postal Service and GAO, one comes away that Mr. Donahoe’s plan is much ado about nothing. Its savings are derived from basic steps, small changes, that could be taken at any time without disrupting a successful insurance exchange and the healthcare of millions. Its promises of comparable costs and benefits for enrollees are illusory, dependent on a number of factors, changes in law, contract negotiations, positive assumptions and actuarial choices.
In the end what stands out is that a great deal of effort and public relations have gone into an effort to remove the Postal Service from its government moorings.
[Mr. Jamison is a retired postmaster and a regular contributor to Save the Post Office; his articles are archived here. He can be reached at [email protected]]
(Cartoon credit: Tom Cheney)